Wednesday, April 18, 2007

Calls of Note Part 3

- Baird notes that although Komag (NASDAQ:KOMG) already preannounced (positive revenue) Q1 on March 21, Seagate's downward revision to Q2 estimates implies Komag could see some softness in Q2 as well. Firm notes that unit demand is the key metric for KOMG and that most of Seagate's margin/estimate reductions are driven by more competition/aggressive pricing (which would not impact KOMG and could actually help drive unit demand).

Given Seagate results, they are lowering 2007 EPS estimate to $3.90 from $4.00, driven by a weaker 1H profit picture. 2008 estimate is 4.50. Firm is lowering their price target to $39 from $44, based on 10x new 2007 EPS estimate of 3.90.

Given already negative sentiment and meaningful estimate reductions over the past few quarters, they believe a sentiment and fundamental trough is near and encourage value investors to accumulate shares on the near-term weakness. With a strong industry position, multiple growth drivers and prospects for meaningfully stronger results in 2H (from increased unit demand) amid reasonable valuation (<8x 2007 EPS), the firm maintains their Outperform rating.

Notablecalls: KOMG's chart sure looks weak here. Most of co's top customers have the ability to manufacture disk platters internally. This is the main reason why KOMG's stock trades at such a low valuation.